life cycle costs

7/27/2019 Life Cycle Costs

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LIFE-CYCLECOST ANALYSIS:

A POSITION PAPER

AMERICA RIDES ON US



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Introduction

Many agencies are turning to lie-cycle costanalysis (LCCA) as a means o evaluating thelong-term economic viability o pavementdesigns. As such, it is important or each agencyto conduct a realistic assessment o pavementeconomics in order to provide objective input intothe lie-cycle cost analysis.

The determination o lie-cycle costs o

alternative pavement types is an importantpart o a rational means or decision making.An appropriate and non-biased method orlie-cycle cost analysis is articulated by theFederal Highway Administration (FHWA) inDemonstration Project No. 115 (FHWA, 1998).It uses the net present value (NPV) approach odetermining the costs o several alternatives.The Asphalt Pavement Alliance has developedsotware capable o perorming lie-cyclecost analysis using the FHWA procedure. This

sotware can be downloaded or ree romhttp://www.AsphaltRoads.org/why-asphalt/economics.html.

Net Present Value Method

A simplied sketch o how the net present valuemethod o lie cycle cost analysis works is shownin Figure 1. The initial cost, the rehabilitationcosts, and the salvage value are all consideredaccording to what their values would be in termso the present value o money. Then a discount

rate actor is applied to account or the time valueo money, and the uture rehabilitation costs andsalvage value are discounted back to the present.This simply means that dollars in the presentare presumed to be worth more than dollars inthe uture. The lie-cycle cost is then the sum othe initial costs and discounted uture costs andsalvage value.

Initial Construction

Rehabilitation

Time

Cost

Salvage

FIGURE 1: SKETCH OF NET PRESENT VALUE APPROACH

TO LIFE-CYCLE COST ANALYSIS.

In determining the lie-cycle cost o a pavement,it is important to include only those costs whichpertain to the pavement. In other words, commoncosts such as striping, sod, guardrails, etc. shouldnot be included unless the dierence in pavementtype causes a cost dierential in these items.

» INITIAL COST

The basis or cost o the initial construction

should be unit prices rom bid records oprojects constructed over the last two or threeyears, and only representative prices shouldbe included. For example, very small projectsor projects where paving is only a minorcomponent o the total cost may cause unitprices to be skewed.

It is realistic to consider the initial cost both byitsel and as part o the lie-cycle cost analysis.This recognizes that the agency is constrained

by an annual budget, and needs to examinethe short-term ramications o expendituresas well as the long-term impact o pavementtype decisions.

» PREDICTED PERFORMANCE LIFE

It is important that the agency reer to its pastexperiences with dierent pavement types.

LIFE-CYCLE COST

ANALYSIS: A POSITION PAPER



It is recommended that at least two categorieso asphalt pavements be used: pavement lessthan eight inches thick over granular baseand pavement greater than eight inches. Itis important to document the perormancerom the time o original construction orreconstruction until the next reconstruction.

In other words, a simple overlay or mill andll are rehabilitation activities and do notconstitute the end o the pavement lie.

The analysis period should be long enough tocapture major rehabilitation or reconstructionactivities or all pavement options. Whenthe Perpetual Pavement concept is used,reconstruction occurs well outside thenormal analysis period o 30 to 50 years. TheAsphalt Pavement Alliance recommends that

the analysis period be no less than 40 yearsand that it include at least one rehabilitationactivity or each pavement option (APA, 2010).This complies with the FHWA-recommendedminimum o 35 years.

It is very important that the predicted timingand extent o the rst rehabilitation be basedupon actual construction and pavementmanagement data rather than memory or judgment. Inormation collected rom all 50

state highway agencies shows that the mostrequently occurring perormance period usedbetween initial construction and rst overlayis 20 years, while the average or this sameinterval was 15.7 years (APA, 2010). The sameinormation rom 50 states showed the averageperormance period used between rst andsecond overlay was another 12.0 years, sothe average time rom initial construction tosecond overlay is 27.7 years. These gurescorrespond well with an FHWA study o asphalt

overlay perormance rom the Long-TermPavement Perormance study which showedthat most overlays lasted or over 15 yearsand many lasted or more than 20 years beoresignicant distress was noted (FHWA, 2000).

The above data and policies refect averages,and, in some cases, engineering judgment,rather than data collected over a number

o decades and rehabilitation practices indierent jurisdictions. They do not accountor recent improvements in the selectiono materials, mix design procedures,and pavement design methods. Theimplementation o Superpave occurred inthe mid-1990s, and SMA was adopted by a

number o agencies throughout the 1990s,so the impacts o these improvements onperormance have not been ully realized.Such improvements come at higher costsor materials, so it is logical to give someconservative credit or perormance althoughit may not be completely documented. Oneapproach, suggested by Von Quintus (2009), isto use a technique known as “survival analysis”to extrapolate the perormance o newertechnologies.

» MAINTENANCE COSTS

Maintenance costs are requently dicultto dene because o either a lack o recordkeeping or accounting that does notappropriately discriminate between dierenttypes o maintenance activities. Maintenancecosts in a lie-cycle cost analysis usually haveminimal impact when compared to the initialand rst rehabilitation costs. I maintenancecosts are used within an LCCA procedure, thenhistorical documentation o actual pavementactivities and expenditures should be used.As with rehabilitation, unrealistically requentor inappropriate maintenance activities canarticially increase lie-cycle cost.

» SALVAGE VALUE

Because some or all o the pavement structurecontinues to serve its purposes beyond theanalysis period, it is important to account or

its condition at the end o the analysis period.Salvage value is typically the term used inlie-cycle cost analysis, but FHWA chooses touse the term “remaining service lie” (RSL)value to distinguish the idea that the pavementwill continue to serve beyond the end o theanalysis period. Another method used is toconsider the salvage value as some percentageo the initial pavement construction cost.

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» DISCOUNT RATE

The selection o a discount rate in lie-cyclecosting can be contentious because there is agreat deal o uncertainty associated with utureinterest rates and infation. An unreasonablylow or negative discount rate essentially

means that it would not matter nancially ia project were to be constructed today or 10years rom now. This would overemphasizethe infuence o uncertain uture costs. Toohigh a discount rate would overemphasize theimportance o the initial cost. The Mechanistic-Empirical Design Guide (MEPDG) rom theAmerican Association o State Highwayand Transportation Ocials recommendsestablishing the discount rate according tothat set by the ederal Oce o Management

and Budget Circular A-94 which is updatedannually. This circular may be accessedthrough this web site: http://www.whitehouse.gov/omb/circulars_a094/.

Based upon a survey o states (APA, 2010), anaverage discount rate o 3.7 percent is usedin the U.S. with a range between 2.3 and 6.0percent. It is interesting to note that 23 stateshave chosen to use a discount rate o 4 percentwhen perorming lie-cycle cost analysis.

Summary

Lie-cycle cost analysis is a tool that can helpevaluate the long-term benet o structures.However, it must be correctly used andthe data used in conducting LCCA must bederived rom existing records that accurately

refect the expectations or the initial cost,rehabilitation timing and costs, salvage value,and discount rate. Some o these data existin readily retrievable and usable orm whileothers will require that an agency examine itsown documented experience. It should also beremembered that the lie-cycle cost analysis isonly a tool, and its results do not constitute adecision. The decision or selecting a particulartype o pavement should also consider actorsnot incorporated in the lie-cycle cost analysis.

References

- APA. 2010. Pavement Type Selection. IM-45.Asphalt Pavement Alliance. Lanham, MD.

- Federal Highway Administration. 1998. LifeCycle Cost Analysis in Pavement Design, ReportNo. FHWA-SA-98-079, Federal HighwayAdministration, Washington, D.C.

- Federal Highway Administration. 2000.Performance Trends of Rehabilitated ACPavements, Tech Brie No. FHWA-RD-00-165,Federal Highway Administration,Washington, D.C.

- Von Quintus, H. 2009. PerormanceCharacteristics o the Ideal Asphalt Pavement. Jn. Assn. Asphalt Paving Technologists.Association o Asphalt Paving Technologists.White Bear Lake, MN. pp. 941-968.

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Appendix

Life-cycle Cost Analysis Synopsis – Talking Points

- Lie-cycle cost analysis (LCCA) is an importanttool or use in decision making or largehighway projects, although actors other than

economics should also be considered.

- Only those cost actors aecting pavementshould enter into LCCA perormed to selecta pavement type selection.

- Initial costs should be based on bid recordsover the last two or three years.

- Predicted pavement perormance should bebased upon actual data analyzed to refect timeto rehabilitation and reconstruction.

- Maintenance costs are usually dicult todetermine and have a negligible eect on theoutcome o LCCA.

- Salvage value is most oten determined by theremaining service lie at the end o the LCCAanalysis period.

- The discount rate refects the time value omoney and thus should be considered overa long history o 30 years which ensures that

fuctuations over a short period do not biasit. The Oce o Management and Budgetmaintains inormation on the discount rateover long periods and should be the sourceo data used.

- Asphalt pavements are more economical tobuild and maintain as shown in studies inColorado, Kansas, and Ohio.

- Other advantages of asphalt pavements

include:

- Sustainability — They are 100 percentrecyclable.

- Perpetual Pavement design will result inreduced consumption o materials andless trac congestion.

- Low noise — Using a small aggregate sizeor open-graded riction course will reducenoise levels in sensitive areas.

- Saety — Using open-graded rictioncourse asphalt mixtures has proven toreduce wet-weather accidents and

save lives.

For More Information,Contact Us

» Asphalt Pavement Alliance

5100 Forbes Boulevard2nd FloorLanham, MD 20706877.272.0077 Voice301.731.4621 Fax

www.AsphaltRoads.org

M-53 SEPT 2011

life cycle costs

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